Académique Documents
Professionnel Documents
Culture Documents
to accompany
Chapter 18
Chapter 18
Bond Fundamentals
Questions to be answered:
• What are some of the basic features of bonds
that affect their risk, return, and value?
• What is the current country structure of the
world bond market and how has the makeup
of the global bond market changed in recent
years?
Chapter 18
Bond Fundamentals
• What are the major components of the world
bond market and the international bond
market?
• What are bond ratings and what is their
purpose?
• What is the difference between investment-
grade bonds and high-yield (junk) bonds?
Chapter 18
Bond Fundamentals
• What are the characteristics of bonds in the
major bond categories such as governments
(including TIPS), agencies, municipalities,
and corporates?
• How does the makeup of the bond market in
major countries such as the United States,
Japan, the United Kingdom, and Germany
differ?
Chapter 18
Bond Fundamentals
• What are the important characteristics of
corporate bond issues developed in the
United States during the past decade
such as mortgage-backed securities,
other asset-backed securities, zero-
coupon and deep discount bonds, high-
yield bonds, and structured notes?
Chapter 18
Bond Fundamentals
• Within each of the major bond categories,
what are the differences between major
countries such as the United States,
Japan, the United Kingdom, and
Germany
• How do you read the quotes available for
the alternative bond categories (e.g.,
governments, municipalities, corporates)?
Basic Features of a Bond
• Pay a fixed amount of interest periodically
to the holder of record
• Repay a fixed amount of principal at the
date of maturity
Basic Features of a Bond
• Bond market is divided by maturity
– Money Market - short-term issues that mature
within one year
– Notes - intermediate-term issues that mature
between one and ten years
– Bonds - long-term obligations with maturity
greater than ten years
• Remaining life (maturity) affect price
volatility
Bond Characteristics
• Intrinsic features
– Coupon - yield (interest income)
– Maturity - term or serial (municipalities)
– Principal value - different from market value
– Type of ownership - bearer or registered
• Types of Issues
– Secured (senior) bonds
– Unsecured bonds (debentures)
– Subordinated (junior) debentures
Bond Characteristics
• Indenture provisions
• Features affecting a bond’s maturity
– Callable (call premium)
– Noncallable
– Deferred call
– Nonrefunding provision
– Sinking fund
Rates of Return on Bonds
Pi, t +1 + Int i, t
HPR i, t =
Pi, t
where:
HPRi,t = the holding period for bond i during the period t
Pi,t+1 = the market price of bond i at the end of period t
Pi,t = the market price of bond i at the beginning of period t
Inti,t = the interest payments on bond i during period t